global views 03-18-11 - scotiabank global banking and … swans to continue trumping data flow in...

Global Views is available on: www.scotiabank.com, Bloomberg at SCOE and Reuters at SM1C

Global Views

Weekly commentary on economic and financial market developments March 18, 2011

Economics > Corporate Bond Research

Emerging Markets Strategy >

Contact Us >

Economic Statistics > Financial Statistics >

Forecasts >

Equity Strategy > Foreign Exchange Strategy >

Fixed Income Research

Black Swans To Continue Trumping Data Flow In Shaping Market Direction ............................Gorica Djeric & Derek Holt

Fallout.......................................................................................................................................Aron Gampel

Domestic Economic Impact of Japan’s Natural Disaster ............................................... Alex Koustas & Adrienne Warren

Earthquake Adds To Investor Nervousness ................................................................ Gorica Djeric & Sarah Howcroft

The Fiscal Parameters of Japan’s Earthquake Disaster ................................................... Nathan Joshua & Mary Webb

Latin America in the Context of the Japan/Middle East/Africa Shocks ...............................................................Pablo Bréard

Bank of England’s Response to Inflation Developments Attracts Market’s Attention .................................Tuuli McCully

A New Market for Mexican Homebuilders................................................................................... Araceli Espinosa & Joe Kogan

Flight-To-Quality Favours Large Caps ......................................................................Vincent Delisle & Hugo Ste-Marie

G7 Agrees to Coordinated FX Intervention to Halt Disorderly Yen...................................................................Camilla Sutton

USD and EUR Valuation vs. the EM Asian Currency Bloc ............................................................................... Sacha Tihanyi

2-10 Economics

Key Data Preview................................................................................................................................... A1-A2

Key Indicators......................................................................................................................................... A3-A5

Global Auctions Calendar....................................................................................................................... A6-A7

Events Calendar ...........................................................................................................................................A8

Global Central Bank Watch ..........................................................................................................................A9

Forecasts....................................................................................................................................................A10

Latest Economic Statistics..........................................................................................................................A11

Latest Financial Statistics ...........................................................................................................................A12

A1-A12 Forecasts & Data

2

3-4

5

6

7

8

9-10

11-13 Emerging Markets Strategy

14-15 Equity Strategy

16-18 Foreign Exchange Strategy

2

Global Views

Economics

March 18, 2011

THE WEEK AHEAD

Black Swans To Continue Trumping Data Flow In Shaping Market Direction

Focus will be on Japan's crisis, Middle East tensions, EU Summit, German elections, key weeks for the UK and Canada. Full calendars follow on pp. A3-A9.

Forget the data flow next week, as black swans will continue to dictate market direction. Event risk is in the driver’s seat. While black swans used to be simply called tail events and can be readily absorbed in good times, they are far more disruptive during periods of major upheaval in the global economy like today. Be-yond the guess work surrounding the measurable economic impact of unique events like Japan’s disasters and ongoing tensions in the Middle East, lies the immeasurable effects of the uncertainty premium. Buffetted by one disruptive shock after another, perhaps only imprudence would have global households and companies putting liquidity aggressively to work in driving growth, and this cautions against premature policy tighten-ing. In this issue, various authors examine aspects of the impact of Japan’s natural disasters. The greatest un-known, however, traces itself to Fukushima which continues to hold the potential to swing markets abruptly. What I thought interesting about G7 yen intervention to stem its post-disaster slide was how modestly the yen moved in response. Either that’s because it was a dose of intervention-lite, as other countries trade off con-trolling FX volatility against beggar thy neighbour currency policies. Or speculation on the expected volume of capital repatriation needed to cover future rebuilding overwhelms modest intervention. Regardless, next week’s Asian data — particularly Japanese CPI and trade — will only chart the path already followed prior to the severe disruptions. European markets could arguably have at least as significant a market impact as developments in Japan and the MENA states (Middle East, North Africa) next week. It’s a key week for the UK. BoE minutes on Wednesday will disclose the current tally of dissenting votes — although for a decision made prior to many of the shocks currently being evaluated. The UK budget also lands on Wednesday, and will form the basis for updated assessments of its drag effects on UK growth. The much heralded European Union summit on March 24th-25th could well disappoint peripheral spreads. The pre-announced recent agreement to expand the effective size of the stabilization apparatus by enhancing guarantees is helpful, but not a game changer. Now in further question is the ratings status of some of the guarantors — upon which the rating of the entire apparatus rests — as they take on much larger contingent liabilities. Further, the agreement only addressed the potential supply of aid, not the willingness to accept it, and countries like Ireland are a long way from accepting further EU intrusion into domestic policies. After being trounced in Hamburg’s election, German Chancellor Angela Merkel and her coalition partner must also sell the expanded arrangements in another state election in Saxony-Anhalt on Sunday, followed by two more in Baden-Württemberg and Rhineland-Palatinate the following Sunday. There are three more state elections in September. Next week’s focus has to be upon impressing markets and voters that a more permanent solu-tion to fiscal and credit market woes lies in waiting, but it’s doubtful this will happen. Canadian markets will follow the global tone, as Tuesday’s Federal budget is unlikely to represent any major shift in course. The focus will be upon reachieving a low budgetary deficit-to-gdp ratio within two fiscal years, and balance or nearly so not long after that. Fiscal drag will remain in place for this year as key stimu-lus spending drops off the books, but how the opposition can or will react is what raises the risk of a Spring election. BoC Governor Mark Carney also participates in a panel on March 26th, and a positive retail sales report is scheduled for release on Tuesday. US markets are unlikely to hold much sway over global markets next week, as they follow the tone set else-where. Data flow will be modest, but should on balance have a positive tone particularly later in the week through expected gains in big ticket durables spending, and slightly higher final Q4 GDP revisions. There is significant speech risk with six Fed speeches on tap.

Derek Holt (416) 863-7707 [email protected]

Gorica Djeric (416) 862-3080 [email protected]

3

Global Views

Economics

March 18, 2011

COMMENTARY

The global economy’s resilience is being tested, with the fallout from Japan’s crisis compounding the impact of escalating geopolitical tensions, the run-up in oil and food costs, and renewed sovereign debt concerns in the euro zone.

Financial Market Volatility — Uncertainty has increased and confidence has declined in the face of new challenges to global growth. Risky business has morphed into acute risk aversion. The sharp retrenchment in equity markets around the world, the major reversal in longer-term government bond yields, a slump in most economic-sensitive commodity prices, and the renewed safe-haven bid to the U.S. dollar, are reflections of a key difference that stands the current situation apart — not one, but multiple challenges to the expectation that global growth was on an improving trend. These hurdles, besides stretched valuations after an unprecedented two-year bull-like run, are significant. They include rising oil prices triggered by renewed geopolitical tensions at the centre of the oil-producing world, renewed sovereign debt concerns in the peripheral European countries, the potential for slower growth in China, and more recently, the catastrophic earthquake/tsunami combination that has essentially stopped the world’s third-largest economy in its tracks. Resolving the country’s nuclear nightmare would help provide relief, though investors are likely to remain somewhat cautious until the other hurdles are crossed. Longer-term fundamentals still point to a reversal of the risk trades and a weaker U.S. dollar, renewed but more moderate gains in equity markets, and an upward bias in bond yields. Massive monetary and fiscal pump-priming by the Japanese alongside G7 intervention favours a weaker yen. Global Growth — The immediate economic fallout from Japan’s nuclear meltdown is to delay the recovery efforts, thereby extending and exacerbating the sharp contraction in output. Restoring a reliable electricity grid is critical to reviving production in the roughly 90% of the economy not directly impacted by the shock, as is ensuring that the transportation network — ports, rail, roads and airports — can accommodate the resumption in activity. The reconstruction effort should gather momentum in the second half of the year, and persist well into 2012, though the extent of the radioactive fallout will determine the pace of recovery. In addition to the massive liquidity that will continue to be made available by the Bank of Japan, expect the government to ramp up expenditures significantly, notwithstanding the highest national debt levels among the G7. The current Sendai destruction is far greater than that sustained in the Hanshin quake of 1995, with early estimates of the damage around US$200 billion, or about 4% of Japan’s GDP. At about 6% of global GDP (using purchasing power parity weights), any reduction in Japanese growth this year should send only a relatively minor shudder through the global economy. But because Japan is a significant producer of key inputs into the global supply chain — the auto, technology, commercial airline, and machinery & equipment sectors, for example — global growth will be somewhat weaker the longer the supply chains are stretched or interrupted, even though firms are already attempting to conserve inventories of critical parts and are looking to diversify their supplier base. Although confidence in the economic outlook has been shaken again, the global economy has proved remarkably resilient in recent years despite the deleveraging underway in a number of high profile sectors — housing and finance, for example — in much of the developed world. Time and paying down debt helps to heal, but so does the support provided in some countries by the massive expansion of central bank balance sheets, the resulting low and pro-growth levels of short-term interest rates, and repeated doses of fiscal stimulus. Two additional factors are also at play. The business cycle has become self-sustaining, with the dynamics of growth reinforced by the enhanced profit-generating capabilities of corporations, as well as the continuing strong growth performances being experienced throughout the developing world. Longer-term fundamentals still point to reasonably good output gains this year and next, though the compounding effects on confidence and spending of the repeated shocks of recent months increase the downside risks to growth. Although equity markets are expected to normalize somewhat as the fallout fears dissipate, the loss of wealth internationally associated with this stock market correction, increases in the price of food and energy, and higher borrowing costs in the faster growing regions of the world, should take a bite out of discretionary purchases.

Aron Gampel (416) 866-6259 [email protected]

Fallout

4

Global Views

Economics

March 18, 2011

COMMENTARY

… continued from previous page

Commodities & Inflation — Inflationary pressures had been slowly but surely re-emerging against the backdrop of improving global growth, but much more in the developing nations where the stronger pace of activity had already begun to push wage trends higher. More recently, increasing geopolitical tensions in North Africa and the Middle East had stoked fires under the price of oil and foodstuffs, with concerns that they could jump even higher if the established upward trend in demand bumps up against supply disruptions caused by confrontations, hoarding, and weather-related growing problems. In addition, the upward trend in prices could be exacerbated, albeit temporarily, by the shortages created in Japan for food, milk and other foodstuffs, as we well as for industrial parts and products, if production fails to rebound in relatively short order. But for the time being, however, the developments in Japan have triggered a reassessment of the economic outlook. Expectations of higher inflation do not go hand-in-hand with lower oil prices, lower bond yields, and a renewed shift into the greenback. Just a short while ago, virtually all commodity prices were trending higher. That’s not the case now, with uranium, and other precious metals for example, under downward pressure. If the outlook for global growth has become somewhat less optimistic, then the risks begin to shift away from the inflationary side of the ledger sheet. Longer-term fundamentals still point to an upswing in price pressures — the global economy is still in expansionary mode, and the developing world is running in the relative fast lane of growth. But the upward trend in prices may be more gradual. Currencies & Interest Rates — Yen strength supposedly reflects the repatriation of Japanese assets to pay for the massive dislocations, though sharply lower government bond yields throughout the developed nations send a contrary signal. But with the economy slumping, and the Bank of Japan already stepping hard on the liquidity accelerator, a weaker yen would seem more appropriate under the circumstances, especially if it adds rather than subtracts from export earnings. The fear factor has benefitted the U.S. dollar, in addition to more signs of self-sustaining economic momentum. However, the greenback is likely to resume its weakening trend, with the Fed on hold for the foreseeable future in this uncertain environment, and America’s blockbuster federal budget deficits and accumulated debt going from bad to worse before it inevitably gets better. Sentiment towards the euro has become slightly more positive, with the ECB threatening to raise interest rates to prevent rising food & energy costs from spilling over into wage demands that would put additional strains on the weakened budgets of the peripheral countries already rocked by recession and retrenchment. While Germany continues to be a comparative outperformer, and will benefit from the increased reconstruction demands from Japan, the prevailing uncertainty in the marketplace could still delay or temper the number of prospective rate increases. Ditto for the U.K. The Canadian dollar continues to trade at a premium over the greenback, though the high-flying loonie has lost some air under its wings with the reversal in commodity prices. While Canada’s commodity producers should also benefit from Japan’s rebuilding, the Bank of Canada is expected to remain on hold until later this year at the earliest with the strong currency taking some of the steam out of imported inflation. The upward trend in government bond yields has been interrupted by the renewed fears of slower growth and reduced inflation. However, as the problems confronting investors are resolved, the underlying trends that have been pushing yields higher should reassert themselves. Chronic borrowers with weaker currencies and eroding creditworthiness should witness higher, not lower longer-term rates. Developing nations are expected to remain at the high end of international growth trends. With inflationary pressures emerging, policymakers can be expected to become less accommodative. Rising short-term interest rates will help moderate growth, and reinforce generally stronger currencies in the large surplus-rich countries. Longer-term fundamentals still point to weaker currencies in those developed economies beset by recurring large deficits, growing debt burdens, very accommodative monetary policy, and increasing inflation potential. And once the deflationary fallout dissipates, government bond yields can be expected to move higher (e.g. the United States), especially if these countries are not creditor nations.

Aron Gampel (416) 866-6259 [email protected]

5

Global Views

Economics

March 18, 2011

CANADIAN MACRO

Last week’s devastating earthquake and tsunami in Japan, although a tragic human loss, should have only limited economic repercussions for Canada.

Japan is Canada’s fourth-largest export market (after the U.S., the U.K. and China), with shipments totalling over $9 billion last year. The lion’s share are resource-based products, including coal, copper, lumber and agricultural goods. Yet, this represents only 2.3% of Canada’s total merchandise exports, suggesting any temporary trade impediments should have a limited negative impact on domestic growth. Meanwhile, reconstruction efforts may well lift Canadian exports of building materials such as lumber and metals in the coming months, while demand for food products will remain strong. Among Canada’s regions, British Columbia will be most affected by any temporary export bottlenecks or shifts in Japanese import demand. Japan comprises 15% of the province’s exports, including over 30% its coal shipments, 18% of its sawmill shipments and nearly 50% of copper, nickel, zinc and lead shipments. Given the majority of exported coal is coking coal — used for steel production as opposed to thermal energy — exports may temporarily dip until Japanese industries fully regain their footing. Shipments of mineral inputs such as copper and nickel will likely be affected as well. At the same time, we expect Japan’s rebuilding efforts will provide a major boost to the province’s sawmill exports, offsetting any short-term disruptions in coal and mineral product markets. Japan is likewise Canada’s fourth-largest source of imports (after the U.S., China and Mexico). These imports, largely motor vehicles, machinery and electronic products, totalled just over $13 billion last year, or 3.3% of the total import bill. The temporary shuttering of some plants in Japan will likely lead to short-term production and price distortions in certain tradeable goods given the nation’s key role in the highly integrated global production chain. Sectors most affected include autos and electronics. In particular, Japan’s Canadian motor vehicle facilities (Toyota’s Cambridge and Woodstock plants and Honda’s Alliston plants) could face temporary slowdowns or closures given lean inventories of key parts and components. Ontario will be most affected by these supply disruptions. Although Japanese motor vehicle transmission and power train components have only a 14% share in this segment, many of these parts are highly specialized and not readily substitutable. At the same time, however, reduced North American imports of certain popular Japanese-made models could benefit other Canadian automakers. Similar ripple effects are likely in consumer electronics, with potential component shortages resulting in higher prices for some products. Lower tourism demand is another avenue through which recent events could impact the Canadian economy. Japan is the sixth-largest source of international tourists to Canada (after the U.S., the U.K., France, Germany and Australia). Japanese tourist visits to Canada totalled 243,000 last year, an 18% jump from the prior year. However, this represents only 5% of international arrivals from countries other than the United States. While many commodity prices have fallen back on global growth concerns and risk aversion, this will not derail longer-term investment plans in Canada. Meanwhile, the wealth-dampening effect of the subsequent setback in equity markets on domestic consumer confidence and spending is being tempered by moderately lower gasoline prices and borrowing costs. With a flight-to-safety pushing down bond yields, Canada’s major financial institutions lowered mortgage rates this week. Alongside continuing unrest in the Middle East, heightened economic uncertainty and financial market volatility will reinforce the Bank of Canada’s cautious monetary policy stance.

Adrienne Warren (416) 866-4315 [email protected]

Alex Koustas (416) 866-4212 [email protected]

Domestic Economic Impact of Japan’s Natural Disaster

0 5 10 15

Ontario

Quebec

Alberta

Saskatchewan

B.C.

Source: Statistics Canada

% of total exports, 2010

Exports to Japan

6

Global Views

Economics

March 18, 2011

JAPAN

Japan’s earthquake roils financial markets, producing mixed historical comparisons. Disasters, like the earthquake tsunami that hit Japan on March 11th and the ensuing nuclear crisis, have the potential to send financial markets reeling. The economic landscape and contemporaneous global event risk make it challenging to isolate investors’ reaction to any single event. One thing is clear, fear and uncertainty tend to produce wild swings and bolster demand for safe-haven assets. In times of uncertainty, volatility is generally a winner. In the aftermath of the earthquake, the CBOE Volatility Index (VIX) grew nearly 50% — albeit less of a shock in level terms — before retreating modestly on efforts to contain the nuclear crisis and coordinated G7 currency intervention. While milder than the spikes registered during the Gulf War and the Deepwater Horizon spill, this week’s VIX reaction exceeded those following 9-11 and the Kobe earthquake of 1995. Not surprisingly, Japan’s Nikkei 225 equity index sank 16% through Tuesday, before recouping about 7% by the end of the week. Generally, regional indices and — to a lesser extent — global measures are affected by unforeseen adverse events, but the magnitude of the decline differs depending on the overall global and domestic landscape and the potential for spillovers. Relative to the loss in the local index, this week’s panic selloff had a milder effect on world markets, causing only a 4% decline in the MSCI World equity index. Given the much heavier weight of the US (42%) in the MSCI, the drops following the start of the Gulf War, 9/11 and the Deepwater Horizon oil spill — all US events — were more pronounced. Interestingly, the Kobe earthquake produced a correction equivalent to that of the most recent earthquake. Back in 1995, the Nikkei fell 24% over a five month period, and it was nearly a year before it broke even again. When such events ignite threatening swings in equities, investors looking to protect their portfolios usually seek out safe havens. US treasury yields have often been a favourite in times of heightened uncertainty. The 10-year bond yield has slipped 0.16pp this week on events in Japan and elsewhere. Similar responses followed the Exxon Valdez oil spill, the Kobe earthquake and the Gulf oil leak of 2010. The yen and the USD — considered defensive currencies — have also been quite reactive to destabilizing global events. Following the Kobe disaster, the yen appreciated by more than 18% to reach a record high against the greenback in April 1995. However, this was the result of major capital repatriation ahead of reconstruction spending, not safe haven seeking. The currency finally weakened on the coordinated intervention of the Bank of Japan and the US Fed. This week saw a similar 3.5% spike in JPYUSD, to a new record high, driven largely by the anticipation of repatriated funds. This time the BoJ, in concert with G7 authorities, reacted more swiftly, and seems to have succeeded — at least in the short term — in putting the brakes on the yen and a floor underneath financial markets. Moreover, the BoJ’s massive liquidity injection ahead of this week’s 20-year bond auction may have encouraged decent demand, at a slightly higher cost. Next week’s auctions will shed more light on investor sentiment and the effectiveness of recent responses. As in the past, we think that the bearish sentiment will dominate in the short-term, but — assuming that the nuclear situation will be contained — the upcoming rebuilding activity should boost demand for commodities and have a stimulatory effect on economic growth at home and abroad.

Sarah Howcroft (416) 607-0058 [email protected]


Earthquake Adds To Investor Nervousness

% change Days to Trough Days to Break-even

Three Mile Island 28-Mar-1979 N/A N/A -1 3 1 -

Chernobyl 26-Apr-1986 N/A N/A -4 14 6 2

Exxon Valdez Oil Spill 24-Mar-1989 N/A N/A - - - -

Gulf War 2-Aug-1990 78 -21 -16 49 10 months 14**

Kobe Earthquake 17-Jan-1995 15 -4 -24 6 months 4 months 18

9/11 11-Sep-2001 37 -12 -7 4* 7 -2

Indonesia Tsunami 26-Dec-2004 30 - - - - -0.8

Chile Earthquake 27-Feb-2010 - - -3 2* 1 month 2.8

Deepwater Horizon Spill 20-Apr-2010 160 -15 -15 52 3 months -

Sendai Earthquake 11-Mar-2011 50 -4 -16 2 ongoing 3.5

* After markets reopened. ** After end of war. Source: Bloomber, Scotia Capital Economics.

Disasters Produce Varying Market Reactions

MSCI World (% change)

Domestic Equity Index Local Currency (% change)

VIX (% change)

DateEvent

7

Global Views

Economics

March 18, 2011

FISCAL

The extent of government’s eventual emergency and reconstruction expenditures remains uncertain, but Japan’s recent Budget underscores fundamental fiscal issues.

It is still too early to accurately assess the impact of the recent earthquake on Japan’s government deficits. Near-term, government revenues will be eroded by the losses in output and wealth. As reconstruction expenditures gain momentum, Japan’s GDP growth will be bolstered but government debt will be pushed higher. Prime Minister Kan’s government will be shifted away from the fiscal management targets presented in its Budget for fiscal 2011 beginning this April 1st — namely holding new government bond issuance to the estimated FY10 level of ¥44 trillion and restraining through FY13 General Account expenditures less the debt service to FY10 levels. On a general government basis, Japan’s deficit, estimated by the IMF to have improved to 9.4% of GDP in 2010, will likely retest the 10% threshold in 2011 (Chart 1). The magnitude of the eventual reconstruction expense and its split among governments, insurers and the private sector are still very uncertain. The central government will likely step up to assist regional and local jurisdictions with their share of the rebuilding burden. The aftermath of the 1995 Hanshin earthquake centred on Kobe suggests that government’s outlays over the next four to five years related to this disaster could be at least ¥8 trillion, but this amounts to only 0.4% of GDP annually. Yet investors may be nervous about the additional borrowing when Japan’s general government gross debt, according to the IMF in January, is now greater than 220% of GDP, more than twice the 92½% level in 1995. Japan’s domestic saving pool, however, is broad and deep, the Japanese economy is advanced and its stock of net international assets is considerable. It is the government’s Budget that best highlights the longer-term issues coinciding with the reconstruction. For the third year in a row, government bond issuance will outstrip tax revenues in FY11 (Chart 2). The debt service has ballooned from less than 13% of General Account expenditures in FY80 to a projected 23% share in FY11 (Chart 3), even with extremely low interest rates. Interest charges plus Social Security-related expenses in FY11 are expected to absorb over half of government’s outlays. To date, Prime Minister Kan’s government has made little headway in negotiating fundamental reforms. Perhaps this emergency may spur some progress.

Mary Webb (416) 866-4202 [email protected]

Nathan Joshua (416) 866-5338 [email protected]

The Fiscal Parameters of Japan’s Earthquake Disaster

-50

0

50

100

150

200

250

80 88 96 04 12f

-12

0

12

24

36

48

60% of GDP

Japan's Pre-Disaster Deficit and Debt Outlook

Source: IMF, January 2011, Scotia Economics.

% of GDP

Gross Debt, LHS

Net Debt, LHS

Budget Balance, RHS

0

20

40

60

80

100

120

FY91 95 99 03 07 11p** General Account basis, FY11 ends March 31, 2012. ** Includes Construction Bonds and as of FY94, Special Deficit-Financing Bonds. Source: Japan Ministry of Finance, Dec. 2010.

trillion Yen

Total Expenditures*

Tax Revenues*

Government Bond Issues**

Japan's Pre-Disaster Budget Arithmetic

17.4 17.6 15.910.0 13.3

5.4

51.243.2

36.6

29.7 25.2

22.1

18.821.6

16.0

23.017.7

18.2

11.114.1

18.816.6

19.731.1

1.5 3.512.7

20.7 24.0 23.3

0

20

40

60

80

100

FY60 70 80 90 00 11p

The Shift in Japan's General Account Expenditures

Debt Service

Local Allocation, Tax Grants

Social Security

Other*

Public Works

% of total

*Includes areas such as education, science and defense. Source: Japan Ministry of Finance, Dec. 2010.

Chart 1

Chart 2 Chart 3

8

Global Views

Economics

March 18, 2011

LATIN AMERICA

Better preparedness to weather global financial market volatility. Market metrics point to a renewed phase of global risk aversion. Global equity securities are under pressure, US equity market volatility increased, emerging-market sovereign debt (yield) spreads widened and commodity prices adopted a defensive tone. Moreover, the Japan nuclear crisis, the waves of political insurgency in Northern Africa and the Middle East, the non-fly zone resolution by the UN Security Council in Libya, joint G7 intervention to stem yen appreciation and growing expectations of monetary policy tightening in Europe, hint at the beginning of a period of asset price adjustments within the emerging-market asset class. On a positive note, short-term funding metrics do not highlight deterioration in financial sector systemic risk in advanced economies. Nevertheless, the Latin American region is well prepared to weather the disruptive events that have recently caused a major spike in global risk aversion. The most financially integrated open economies in the region are immersed in a phase of sustainable growth and count on vast international reserves to be deployed to contain inflation-sensitive foreign exchange volatility. Latin American stock markets are not (and will not be) immune to a sell-off period in US equity securities. Without exception, all regional markets were adversely hit by the declining phase present in US markets. The combined effect of selling pressures and falling commodity prices also caused a spike in currency market volatility within the region. The market-benchmark EMBIG sovereign debt spread index widened to 300 basis points (bps), strongly correlated with a spike in the US equity volatility VIX index over the past two weeks. Undoubtedly, the persistence of geo-political tensions in the Middle East and Northern Africa provided an ideal opportunity to assess the continuity of emerging-market gains. However, abrupt price movements in financial markets are not uniform throughout the region. It is worth noting that Brazilian equity assets had found a technical barrier to extend gains since last November, finding strong resistance to recover a bullish trend. Within the BRICS group (Brazil, Russia, India, China and South Africa), equity market shifts were not uniform either; in fact, the spike in crude oil prices (the benchmark WTI price is trading again over the US$100 per barrel mark) as a result of geo-political tensions in oil-producing nations has translated into sustained gains in Russian assets whereas Indian stocks showed a relatively weaker tone due to deteriorating inflation and escalating energy costs. The Latin American currency markets face a period of volatile adjustments in response to recent (domestic) policy moves and (external) market developments. The Brazilian real (BRL) will be influenced by potential pressures if the correction of global equity securities (particularly in emerging-market economies) persists in the near term; however, selling pressures will be tempered by very attractive interest rate differentials (the Brazilian monetary authorities are expected to increase the target SELIC rate by 50 bps to 12.25% on April 20th). The Chilean peso (CLP) has been subject to escalating volatility and depreciating pressures due to the dual effect of falling copper prices and increasing oil prices; however, recent joint global intervention to moderate yen strength and the surprise increase in the Chilean monetary policy rate by 50 bps to 4% has injected a recovery tone into the CLP, which closed the week at 482 per USD. Finally, Mexico has been one of the major beneficiaries of this renewed phase of global/regional financial/commodity market volatility. Surging crude oil prices, relative currency undervaluation, the absence of intervention mechanism and the growing expectation of monetary tightening have all been supporting factors in favour of the Mexican peso (MXN) which traded below the 12 per USD mark earlier in the week. Finally, the Colombian peso (COP) will continue to be well supported by favourable commodity prices, the expectation of higher government-administered interest rates and the recent revision to investment grade by Standard and Poor’s, which would help attract foreign direct equity investments in the near term.

Pablo Bréard (416) 862-3876 [email protected]

Latin America in the Context of the Japan/Middle East/Africa Shocks

9

Global Views

Economics

March 18, 2011

EUROPE

UK monetary authorities face the challenge of finding a balance between limiting further inflationary pressures and supporting economic growth.

Inflationary pressures continue to intensify in the UK, prompting futures markets to anticipate an early beginning of the monetary tightening cycle despite the economy’s uncertain growth outlook. While British monetary policymakers are becoming more concerned about increasing inflation, the Monetary Policy Committee of the Bank of England (BoE) opted to keep the Bank Rate unchanged at 0.5% following its March 10th meeting. The minutes of the latest decision will be published on March 23rd, and might shed more light into the divergences among the policymakers as some appear hawkish about inflation risks while the others remain concerned about economic growth prospects in the context of the country’s ongoing fiscal consolidation efforts. The next rate decision is scheduled for April 7th. Futures markets are pricing in a 25 basis point hike in the Bank Rate by the end of the second quarter, once first-quarter economic data are released and assessed by both the authorities and market participants. Headline consumer price inflation has exceeded the BoE’s 2.0% inflation target since December 2009. In January 2011, the consumer price index increased by 4.0% y/y, prompting the BoE Governor Mervyn King once again to send an explanatory letter to the Chancellor of the Exchequer. Prices at the core level are picking up as well (core inflation reached 3.0% y/y in January). Price pressures further up the distribution chain suggest that inflation will accelerate in the coming months; producer prices increased by 4.8% y/y in January. Meanwhile, wage pressures have also intensified but remain below the pre-recession levels on the back of large spare capacity in the economy. Scotia Economics expects headline inflation to hover above 4% y/y in the coming months before subsiding to 3.6% by year-end. There are three main reasons for the high inflation rate, according to Central Bank Governor King: 1) The 2.5 percentage point rise in the Value Added Tax (VAT) to 20% in January 2011. This year’s adjustment in the VAT follows a similar increase a year earlier; while the direct impact of the January 2010 hike has dropped out of the inflation index, the second round impacts may still be adding to cost pressures. 2) The continuing pass-through impacts of the fall in the British pound (GBP) at end-2007 and in 2008 when the GBP depreciated by almost 35% vis-à-vis the US dollar (USD) and over 31% against the euro.

Tuuli McCully (416) 863-2859 [email protected]

Bank of England’s Response to Inflation Developments Attracts Market’s Attention

-3

-2

-1

0

1

2

3

4

5

6

Jul-08 May-09 Mar-10 Jan-11

y/y % change

Headline Inflation

Source: Bloomberg.

U.K.

Switzerland

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

Jul-08 May-09 Mar-10 Jan-11

y/y % change

Core Inflation

Source: Bloomberg

U.K.

Switzerland

euro zone

U.S.

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

08 09 10

q/q % change (non-annualized)

Real GDP Growth

Source: Bloomberg.

Switzerland

U.S.

euro zone

U.K.

10

Global Views

Economics

March 18, 2011

EUROPE


3) Recent increases in commodity prices, particularly food and energy, which have risen at double-digit rates in the past three months (transport and food account for 16% and 12% of the consumer price index, respectively). Nevertheless, developments in the Middle East and in Japan may alter the commodity price outlook to either direction. The BoE estimates that without these three impacts, the inflation rate would currently be below the 2.0% target. The extent to which the inflation rate might fall next year is uncertain given increasing expectations of price increases by households and businesses. A fresh survey shows that expectations for inflation over the next 12 months have risen from 3.9% y/y in November to 4.0% y/y in March; the inflation rate next year is expected to be 3.4% (compared with 3.2% in the survey last November) and 3.5% y/y in the long term (versus 3.3% in November). By the same token, however, a risk of low economic activity and persistent spare capacity may push inflation down faster than anticipated. In the latest Inflation Report, the BoE assesses that under the assumptions that the Bank Rate moves in line with market interest rates (i.e. the first hike by mid-2011), the medium term inflation outlook is balanced. While the GBP was one of the strongest major currencies in the first two months of 2011, low economic growth, fiscal consolidation and high inflation dampen the GBP’s outlook. We expect the GBP to close the year at 1.63.


1.30

1.40

1.50

1.60

1.70

1.80

1.90

2.00

2.10

2.20

Jul-07 Jun-08 May-09 Apr-10 Mar-11

GBPUSD

British Pound

Source: Bloomberg.

Emerging Markets Strategy Global Views

11 March 18, 2011

Last month’s release of year end results for the Mexican homebuilders shows that not much has changed, both the good and the bad. The homebuilders we follow, Geo, Urbi, and Homex, all reported continued high margins and significant sales growth (Figure 1), but again at the expense of cash flow generation (Figure 2). That pattern is nothing new, as cash flow is reinvested into the business to fund future growth. A key part of this reinvestment is the purchase of land reserves. For example, Urbi, which has the largest reserve, owns sufficient land for about 292,000 homes, which represents about nine years of sales at 2010 rates. That land reserve is critical to the firm’s high margins, since large chunks of land in undeveloped areas can be purchased cheaply, and then tend to rise in value as the area develops. In the past, the government would grant tax deferrals to the builders in return for their continued purchase of new land, mitigating part of the negative impact on firm cash flow. The rules for such tax deferral will be significantly more restrictive going forwards, and tax bills should increase. Meanwhile, land reserve accumulation should slow, especially among firms who have already built up a sufficient reserve. Note for example that Urbi’s inventories actually fell by 6% in 2010, while those of Homex and GEO rose 17% and 8%, respectively. In addition to land investments, GEO and Urbi (but not Homex) are investing in new technology to accommodate the government’s expected shift towards vertical housing. Continued growth and investment, while perhaps desirable from the perspective of equity holders, brings little benefit and significant risk to creditors; the value of the latter’s claims depend on the ability of the homebuilders to continue to earn returns on those land reserves up to nine years from now. The key determining factor here is government policy towards housing, which has been instrumental to the success of the homebuilders thus far. The biggest source of home financing is currently Infonavit, the government agency that takes in mandatory payroll deductions every month, and then provides financing for home purchases to those workers who have contributed. That agency provided 475,000 loans in 2010 and is expected to provide 480,000 in 2011. The problem is that the number of Infonavit affiliates who still need houses is being depleted; by 2017, Infonavit expects to only offer 300,000 credits. That change would represent a 25% decrease from the total number of mortgages from all sources expected for 2011, and an even more significant decrease for our three homebuilders, who specialize in low-income housing and sell 69% of their homes thanks to the help of Infonavit loans. The good news is that, according to the government, a significant housing shortage exists among Mexicans who are not affiliated with Infonavit but have the savings and income to pay for a home if they can obtain financing. There are four categories of non-affiliated workers that the government is looking at: municipal government employees, professionals like doctors and lawyers, employees in certain service industries working under contract, and of course workers in the informal economy. That last category, perhaps the most important for continued sales to the low-income segment that the homebuilders specialize in, warrants some explanation. Several American investors have asked us why the government would want to finance houses for Mexicans who refuse to join the formal economy and pay taxes. That question raises some interesting cultural differences. According to Mexico’s National Statistics Institute (INEGI), there are 7.5 million people working in the informal sector, composed mostly of domestic workers and street vendors. Having a housekeeper in Mexico is much more common in Mexico than in the U.S. As a result, many Mexicans understand the magnitude of the informal economy as a social problem—that of a large class of people who are poor and uneducated, with few opportunities for participating in the formal economy. For this reason,

A New Market for Mexican Homebuilders

Joe Kogan (212) 225-6541 [email protected]

Araceli Espinosa (5255) 9179-5237 [email protected]

Mexican homebuilders have poor cash flow because they reinvest their profits in land for future development. While a large housing deficit exists in the long term, serving this demand requires new financing schemes. A bill pending in Congress would authorize the housing agency to develop such programs, ensuring that the land the builders have accumulated can be profitably developed.


12 March 18, 2011

government policy may be more geared towards helping these people than prosecuting them for noncompliance with tax laws. In addition, the microfinance industry in Mexico has proven the viability of lending to members of the informal economy. For example, Banco Comportamos reported an astounding 60% net interest margin in 4Q10. Of course, financing home purchases for members of the informal economy would be entering unchartered territory, and there is no way to know what the repayment rates would be on such mortgages. Under current regulations, Infonavit is not allowed to service most non-affiliated groups. A major reform bill currently under consideration that could be approved by Congress as early as April would create the necessary authorizations. Five years from now we could see, in addition to the 300,000 Infonavit credits given to affiliates, an equal additional number of credits given to non-affiliates; as a result, the total number of Infonavit mortgages could grow rather than shrink. Some firms, notably Urbi, have already started preparing for this eventuality by developing programs for non-affiliates. Under one experimental rent-to-own program, workers rent their home for six-months while at the same time furnishing their home and installing fixtures and appliances. Those who demonstrate a stable income by paying their rent would qualify for a mortgage, while those who fell behind would be evicted. In contrast, other firms, like Homex, believe it is premature to plan for government programs that don’t exist yet. Homex argues that their business—building homes—will remain the same no matter how the government ultimately chooses to provide financing for those homes. While we think Urbi’s early involvement may give it a competitive advantage, the magnitude of that advantage is uncertain and comes with some risks. For example, Urbi’s rent-to-own program led to a dramatic increase in accounts receivable in 4Q10 and hurt cash flow, as Urbi awaited payment from a private equity fund that is buying the homes of those who are in the provisional 6 month rental period.

Another risk we should mention is the potential for a resurgence of competition. SHF, the government agency that supports financial intermediaries involved in housing finance, plans to support the provision of $15bn MXN in bridge loans to builders this year, which should be sufficient for 62,000 houses. Over the last two years, large homebuilders have grown at the expense of smaller builders for whom financing had dried up. In fact, Urbi’s practice was to buy up such smaller competitors as one means for achieving growth. The revival of financing for smaller competitors may impede such growth going forwards.




30

35

40

45

50

55

60

06 07 08 09 10

5

10

15

20

25

30

35Sales and Margins

Graph based on sum of financial data for Geo, Urbi, and Homex. Source: Firm annual reports.

bn pesos %

Gross Margin(RHS)

Net Sales(LHS)

Operating Margin(RHS)

Figure 1

-10

0

10

20

30

40

50

2006 2007 2008 2009 2010

Total Land

Annual Cash Flow

Land Reserves and Cash Outflows

Graph based on sum of financial data for Geo, Urbi, and Homex. Source: Firm annual reports.

bn pesos

Figure 2


13 March 18, 2011

Homebuilder bonds performed well in the second-half of last year but spreads have widened in the past month (Figure 4). We are not sure if that is due to lower US Treasury yields, lower global risk appetite due to the conflict in Libya, or investor dissatisfaction with 4Q10 results released at the end of February that overall did not show a material improvement in cash flow. While we do not expect any significant changes in firm performance this year, we could receive important news on public policy soon that would affect the long-term outlook. We like the homebuilders because they offer high-yield but their fundamentals are largely uncorrelated with economic cycles (sales did not fall during the 2009 financial crisis). We do not have a strong preference between the homebuilders since the overriding driving factor for all of them is Mexican public housing policy; bond investors do not distinguish between them either, as evidenced by the comovement of their spreads over time (Figure 4). We note that the 5Y bonds for Urbi and Homex are callable, and the companies are currently evaluating whether to exercise their call and to refinance at lower rates; long term investors may prefer the 10Y point. We look forward to news about the reform bill on Infonavit, which should help to resolve a portion of the uncertainty around the builders’ long term prospects. For our complete report, see “Making houses like tortillas: Mex. homebuilders”, Scotia Capital, October 18, 2010.




0

100

200

300

400

500

600

10 Jan 06 Apr 01 Jul 25 Sep 20 Dec 16 Mar

Homebuilder Spread Over Sovereign – 10Y

Graphs shows spread differentials between homebuilders and UMS, with spreads calculated to 2015 call. Source: Bloomberg.

spread

Homex 19

Urbi 20Geo 20

Figure 4 Figure 3

Homebuilder Spread Curves

0

100

200

300

400

500

600

2010 2012 2015 2017 2020 2022

Mexico HOMEX URBI GEOGraphs show Z-spreads over US swaps. Spreads calculated to par call date for those bonds that are callable. Source: Bloomberg.

Homex

Mexico

Urbi

Geo

spread

Equity Strategy Global Views

14 March 18, 2011

This text was published on March 14, 2011 (all data as at March 11, 2011).

Although the risk-off trade has just started to be more visible, global small-cap benchmarks have been

underperforming since the beginning of the year. The MSCI World Small Cap index is up 2.3% this year, but it is lagging the MSCI World index by 43 basis points. In the U.S., the Russell 2000 is trailing the Russell 1000 by 74 bp year-to-date. Canada is no exception despite the large gold/energy bias in the index. The TSX SmallCap is underperforming the TSX 60 by 291 bp YTD.

Thanks to last Friday's rebound, the TSX SmallCap is performing in-line with the TSX 60 so far in

March. However, seven of nine TSX SmallCap sectors are underperforming their large cap counterparts, with Consumer Staples and Materials being the exception (see Exhibit 1). The biggest names in the TSX SmallCap Materials sector are performing well so far this month, which explains the sector's outperformance vis-à-vis large caps Materials.

The bigger, the better. The migration towards larger cap names is also visible within the TSX SmallCap

index. In Exhibit 2, we look at the performance of TSX SmallCap companies sorted by market capitalization. The top quartile, i.e. the largest companies, is down 1.6% on average in March compared to a 6% decline for the bottom quartile, which includes the smallest companies. The performance spread between the top and bottom quartile is even wider on a year-to-date basis: the top quartile is up 5.5% on average this year vs. a 9.1% decline for the bottom quartile.

Flight-to-Quality Favours Large Caps

Hugo Ste-Marie (514) 287-4992 [email protected]

Vincent Delisle (514) 287-3628 [email protected]

Average

Market Cap - Quartile Market Cap (M$) MTD YTD

Q1 - Largest 1,708 -1.6% 5.5%

Q2 927 -3.6% -3.0%

Q3 569 -3.2% 2.0%

Q4 - Smallest 281 -6.0% -9.1%

TSX SmallCap 868 -3.1% -0.4%

Source: Scotia Capital estimates

TSX SmallCap: The Larger, the BetterPerformance (%)

TSX SmallCap

S&P/TSX TSX 60 Completion SmallCap Relative to TSX 60 (bp)

Index -3.3% -3.1% -3.6% -3.1% 1

Energy -5.6% -5.5% -5.8% -6.5% -97

Materials -4.9% -5.6% -3.4% -2.2% 334

M/Mining -7.0% -6.9% -7.1% -5.8% 115

Golds -3.0% -2.9% -3.5% -3.9% -102

Industrials -0.6% -0.5% -0.9% -1.3% -85

Discretionary -1.3% -0.6% -3.3% -3.0% -239

Staples -1.8% -1.3% -2.9% -0.3% 99

Health Care 0.0% -0.2% 0.5% -5.6% -538

Financials -0.8% -0.4% -2.6% -1.9% -147

Technology -4.0% -4.0% -3.9% -5.3% -132

Telecom -2.6% -2.7% -1.5% n/a n/aUtilities -2.6% -2.7% -2.5% -4.8% -218

Source: Scotia Capital estimates

S&P/TSX Indices PerformanceMTD Performance (%)

Exhibit 1

Exhibit 2

Equity Strategy Global Views

15 March 18, 2011

TSX SmallCap still trading 12.5% above its 200-d MA The TSX SmallCap is down 4.8% from its

recent high reached on February 17, but the index is still trading 12.5% above its 200-d moving average. This is not as bad as a few weeks ago when the index was hovering 20% above its 200-d MA, but as illustrated in Exhibit 3, this is still elevated on an historical basis. Last summer, the TSX SmallCap dropped 11% from peak-to-trough and the index hit its 200-d MA before rebounding (Exhibit 4).

According to our risk-on/risk-off barometer,

the equity risk-reward window was wide open last summer, closed in late Q4/10, and we believe it will re-open again after a healthy pullback (see Exhibit 5). In fact, as long as macro fundamentals continue to improve, and especially U.S. jobless claims, any equity pullback should remain relatively shallow and treated as a buying opportunity.

In the short term, however, technicals could

prevail over fundamentals and indices could re-test lower levels.

Go up in size, Down in beta In the near term, large caps should continue to

outperform small caps, and we would suggest investors reduce beta in portfolios. In Exhibits 6 to 14 (please refer to the Strategic Edge Weekly report dated March 14, 2011), we offer a sector breakdown of the TSX SmallCap index including beta, recent performance, relative strength index (RSI), and sector weighting for each company. Not surprisingly, Materials and Energy sectors have the highest beta (weighted average) in the TSX SmallCap index at 1.3 and 1.6, respectively.

We maintain a 5% cash weighting in our mid-

cap model portfolio and carry an average market cap of $1.5B vs. $0.8B in the TSX SmallCap index. We remain overweight Financials, Industrials, and Technology. Within resources, we are market weight Energy and underweight Materials (Gold).


Hugo Ste-Marie (514) 287-4992 [email protected]

Vincent Delisle (514) 287-3628 [email protected]

TSX SmallCap: Deviation from 200-d MA

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Apr

-00

Apr

-01

Apr

-02

Apr

-03

Apr

-04

Apr

-05

Apr

-06

Apr

-07

Apr

-08

Apr

-09

Apr

-10

Apr

-11

Source: Scotia Capital, Bloomberg

Overbought conditions

Oversold conditions

+1 Stdev

-1 Stdev

TSX SmallCap hit 200-d MA before rebounding last summer

200

300

400

500

600

700

800

900

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

TSX Small Cap

50-d MA

200-d MA


S&P 500 vs. LT Bonds (TLT) - Relative Performance (last 3-Months)

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11


Risk-On Trade Extended

Risk-Off Trade Extended

Exhibit 3

Exhibit 4

Exhibit 5

Foreign Exchange Strategy Global Views

16 March 18, 2011

After a stunning 4.3% appreciation in yen over a ten minute interval, authorities step in to help stabilize markets with the first coordinated FX intervention since 2000.

As North American traders were passing trading books to Asia late on March 16th, the yen experienced a stunning 4.3% appreciation over a violent 10 minute trading interval — see chart. With an average daily turnover of $570bn, USDJPY is one of the most liquid tradable assets in the world, accordingly it is unlikely that the move was an issue of liquidity. Instead it was likely the combination of flows being repatriated into yen, traders positioning for expected yen strength, the collapse of what is left in the carry trade (which has also seen yen sellers evaporate) and model accounts taking advantage of a significant move. By all accounts the trading pattern was disorderly. Should it have continued, it risked a significant destabilization in the financial and economic foundation of Japan. In response and after a request by the Japanese authorities, the US, the UK, Canada and ECB agreed to coordinated FX intervention (the first since 2000 when authorities stepped in to support a weak EUR). After today’s statement was released early in the Asian trading session, the yen immediately weakened 3% and USDJPY climbed to 81.50. At 8am EST, North American authorities followed up with a further round of intervention, pushing USDJPY briefly over 81.50. The G7 stepped in to weaken yen, not because the valuation of yen had become extreme (which it had), but more likely because the trading pattern in USDJPY had become disorderly — see chart. This type of volatility in currencies threatens much more than the economic recovery of the third largest nation. To us, the most important sentence in the G7 statement was: “as we have long stated, excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability”. Above all, the G7’s role was an attempt to stabilize markets. Looking into the past, interventions have had varying degrees of success. The last non-coordinated yen intervention by the BoJ (under the direction of the MoF) occurred on September 15th, 2010, and saw a stunning $23bn purchase of USD against yen, creating an impressive one day 3.4% weakening of yen. This move was then retraced over the following 14 sessions. However the purpose of this round of intervention was more likely to slow appreciation as oppose to halt a disorderly move. Looking ahead, we expect that major sellers of yen (mainly carry trade participants, Japanese institutions looking for foreign expose and investors hoping to benefit from weak Japanese fundamentals) have temporarily evaporated. Leaving the market weighted towards yen buyers (investors trying to position ahead of repatriation flows and repatriation itself, the closing of remaining carry trades and offside short yen positions). We expect that today’s coordinated intervention will provide some temporary relief, but was not meant to, nor will it succeed at reversing near-term yen strength. The chances of repeated intervention by Japan is high, the chance of repeated coordinate intervention will depend on the trading pattern from here. The priority of G7 authorities is the destabilizing result of disorderly movements in foreign exchange markets, and less the negative economic consequences of a strong yen. Any further disorderly movements in USDJPY will likely be met with a renewed commitment from the G7. We expect near-term pressures to favour a stronger yen, however have made no change to our year-end forecast of slight yen weakness. After all, once these initial flows cease, the currency fundamentals in Japan have clearly deteriorated. We hold a year-end USDJPY forecast of 84.00.

G7 Agrees to Coordinated FX Intervention to Halt Disorderly Yen

Camilla Sutton (416) 866-5470 [email protected]

1%

0%

-1%

-2%

-3%

-4%

Mar. 16 Mar. 17 Mar. 18

USDJPY's Disorderly Move


17 March 18, 2011

By constructing USD/EM-Asia and EUR/EM-Asia FX indices, it becomes clear that the USD has recently surpassed its pre-crisis low versus the Asian currency bloc, while EUR remains below its decade high.

In this note, we lay out our construction of nominal effective exchange rate indices for the USD and EUR against the emerging market Asian currency bloc. Understanding the broad behaviour of a currency on a trade weighted basis is important from both a longer term economic point of view, and from the point of view of shorter term trading strategy. In addition, one of the most important relationships in international finance today is that between the US and the EM Asian country group. It is the economic inter-relationship between this group of countries that constitutes the so called “Bretton-Woods II” international financial system that has had such a significant impact on global interest and inflation rates, as well as asset prices over the past decade1. Ultimately, the broad evolution in the value of the USD in terms of these currencies is the subject of much political discourse and economic importance. It has long been conventional wisdom that a longer term depreciation in the USD versus the EM-Asia currency bloc is required to facilitate a global economic rebalancing in order to address large, persistent current account deficits in the US and surpluses in Asia. As such, tracking the evolution of the USD on a broad trade-weighted basis against the emerging Asian currency bloc naturally provides a real time indication of this dynamic. We focus on the nominal effective exchange rate between the USD and the Asian currency bloc due to its importance in shorter term financial market fluctuations, as well as the focus that is placed on nominal exchange rate values by international policymakers and politicians. Below, we describe the construction of our indices and elaborate on some important features. Construction To construct our USD/EM-Asia and EUR/EM-Asia FX indices, we utilize bilateral trade weights between the US, Europe and the following countries: China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand, and Vietnam. Country weights are estimated over a two year period using total overall trade (exports and imports) in order to ensure a balance between incorporating in the weightings the importance of shifting trade patterns, and smoothing away “noisy” short term deviations from medium to long term trends due to temporary economic shocks (like the global financial crisis/recession). A base period for the index is arbitrarily chosen so that Q1 2005 = 100. The index is constructed so that an increase indicates USD (or EUR) strength versus the EM Asian FX bloc. Indices An immediately obvious and interesting feature of our USD/EM-Asia index (Chart 1) is that the index has already surpassed its pre-crisis low and registered its lowest level in over a decade (as of early February). It is our view that this trend depreciation will continue at least through our medium term horizon of the next two years. Growth, fiscal and monetary policy dynamics are projected to remain well in favour of the EM Asian currency bloc. Chart 2 captures the relative monetary policy trend, a very important one indeed for the USD’s overall direction and valuation versus the EM-Asia FX bloc. In recent weeks we have seen further monetary tightening undertaken by Korea, Thailand, and most recently India. For those countries that have recently elected to pause on policy tightening (Indonesia and Malaysia), a hawkish stance is still very

USD and EUR Valuation vs. the EM Asian Currency Bloc

Sacha Tihanyi (852) 6117-6070 [email protected]

Chart 1

85

90

95

100

105

110

USD/EM -Asia Scotia FX Index

00 01 02 03 04 05 06 07 08 09 10 11

Chart 1


18 March 18, 2011

evident. Chart 2 shows the co-movement between nominal policy rate shifts (trade-weighted for EM Asia) and weakness in the USD versus the EM-Asia currency bloc. With policy pro-activity still very much required in Asia, and no sign of policy normalization in the US in the near term, further deterioration in our USD/EM-Asia FX index is likely. Compared with a broad trade weighted USD index (sourced from the Federal Reserve), our constructed USD/EM-Asia index is much less volatile (Chart 3). This makes sense as these currencies have been heavily managed against the USD throughout the past decade, and as the USD depreciated in broad nominal terms against all trading partners, policymakers in the Asian bloc elected to “lean against the wind” of this

depreciatory trend. Interestingly, our EUR/EM-Asia index displays much greater variability, indicating less of a focus on trade competitiveness with the Eurozone vis-à-vis the United States for our Asian reserve managers. This reflects not only the predominance of the USD in global trade transactions, but more importantly the importance of the USD as a global reserve currency with deep, liquid government bond markets. The need to hold a sufficient war chest of precautionary reserves following the Asian financial crisis of the late nineties, combined with the export-oriented growth model pursed by the Asian bloc contributed towards the low volatility of the index. To place the stark differences in volatility between the USD and EUR indices into perspective, we can examine the statistical properties of each index. Indeed, EUR index variance is more than 3.6 times that of USD index volatility. This helps place in perspective the actual size of what on the surface seems like rather restrained moves (due to intervention) in our USD index. For instance, 96% of the daily returns in the USD/EM Asian FX index fall between –0.33% and +0.37%. In fact, a 0.24% return represents a 1.5 standard deviation event, and thus a fairly significant change. Even a 0.1% move in the USD index is still a fairly “impressive” daily shift in the value of the index. The equivalent numbers for our EUR/EM-Asia FX index are –1.28% and 1.27%, while a 1.5 standard deviation euro return is 0.87%. As it stands, the USD/EM-Asia Index is down around 3% on the year, while the EUR index is down 0.5%. We’d expect losses on the USD index to continue to build in coming months. Gains in the EUR index should build, but considering the above analysis, with a greater degree of variance than the more stable USD index. 1This essentially involved heavy management of the currencies in the high-saving EM-Asian bloc versus the USD, in order to support

export-led growth strategies, resulting in rapid FX reserve accumulation and a recycling of export revenues into US government Treasuries. This is hypothesized to have (in recent years) contributed to lower overall global rates of inflation and interest rates depressed below levels that would have otherwise persisted.


Sacha Tihanyi (852) 6117-6070 [email protected]

Chart 3

60

70

80

90

100

110

120

130

140

USD/EM -Asia Scotia FX Index

Fed Reserve USD TWI

EUR/EM -Asia Scotia FX Index

00 01 02 03 04 05 06 07 08 09 10 11

Chart 2

-3%

-2%

-1%

0%

1%

2%

3%

4% 82

84

86

88

90

92

94

96

98

100

Weighted EM Asia Policy Rate Less Fed Funds

USD/EM -Asia Scotia FX Index (rhs - inverted)

06 07 08 09 10 11

Chart 2 Chart 3

19

Global Views

Economics

March 18, 2011

KEY DATA PREVIEW

Key Data Preview

CANADA Tuesday’s retail sales print represents the final leading indicator for January GDP. We are expecting a gain of 1.0% m/m, on the back of a pickup in motor vehicle sales, and a weak base effect following December’s 0.2% contraction. Core (ex. auto) sales should advance by 0.8%. Relevant to GDP is the change in sales volume, and we are looking for a more muted gain on this basis, given the recent strength in food and fuel prices, which are likely to continue to inflate the headline figure (see chart 1). Looking ahead to the March 31st GDP report, the boost to growth from retail will add to the modest lift from housing starts and the substantial push from manufacturing and wholesale sales. Of the remaining available indicators, we know that a steep deterioration in net exports will detract from upward momentum and a flat reading in hours worked will have a neutral effect. However, GDP surprises can always materialize out of the large and unobservable components of resources, utilities and services. UNITED STATES The final print for Q4 GDP is due out next Friday. The consensus view ranges from 2.7% to 3.2% q/q annualized, with our forecast looking for a one-tenth increase to 2.9%, on modest upward revisions to trade, business investment and housing data. Leading indicators suggest that headline durable goods orders (Thursday) are likely to have improved in February, but the strong base effect from the prior month — growth was upwardly revised to the strongest pace since September — and the second straight month of softer commercial aircraft orders are expected to have a dampening effect. Our forecast is looking for a headline gain of 1.0% m/m. According to the latest ISM manufacturing index — strongly correlated with durable goods orders — growth in orders accelerated to the fastest pace since early 2004. Our view is further reaffirmed by the auto sector, which accounts for nearly 15% of the overall durable goods orders, a moderate rise in defense spending and a nominal boost from higher commodity prices and a weaker US dollar. We expect a stronger core (ex. transportation) gain of 1.8%, following last month’s sharp contraction, but also as capital spending continues to benefit from the pick-up in business sentiment (see middle chart). While existing home sales (Monday) have improved since bottoming in July — marking their third straight month of advance in January, but at a slowing clip — data compiled by the National Association of Realtors show a sizeable contribution from sales of distressed properties to investors. New home sales (Wednesday) have been trending along the floor since May (see bottom chart). Leading indicators of resale activity — like pending home sales, purchase mortgage applications and consumer confidence — point to weaker demand in February. We are forecasting a retrenchment of 4.0% m/m to 5.0 million annualized pre-owned units, and gain of 3.5% to 294k new housing units, boosted by a weak base effect from the prior month. A more sustainable pick up in hiring activity is paramount in encouraging potential buyers to step off the sidelines.

A1

Sarah Howcroft (416) 607-0058 [email protected]

Derek Holt (416) 863-7707 [email protected]


60

80

100

120

140

160

180

02 03 04 05 06 07 08 09 10 11

Total

Ex. Transportation

Business Investment

US Durable Goods Orders

Index, Jan. 2002=100

* New & unfilled orders. Source: US Census Bureau, Scotia Capital Economics.

20

40

60

80

100

120

140

160

180

02 03 04 05 06 07 08 09 10 11

Existing

New

US Home Sales

Index, Jan. 2002=100

Source: National Association of Realtors, US Census Bureau, Scotia Capital Economics.

-40

-30

-20

-10

0

10

20

30

40

08 09 10 11

EssentialItems

FoodPrices

GasolinePrices

y/y % change

Cdn Retail Sales and Prices

Source: Statistics Canada, Scotia Economics.

20

Global Views

Economics

March 18, 2011

KEY DATA PREVIEW


ASIA Based on indications of sizable foreign orders of machinery and equipment for January, we expect Japan’s exports to accelerate in February, leading to a rise in the seasonally adjusted trade balance. While imports were also strong during the first month of the year, we believe the outlook for the contribution of net foreign sales to growth remains promising EUROPE The underlying momentum of the euro zone economy remains positive despite the ongoing sovereign credit turmoil. The pre-liminary estimate for the March purchasing managers’ indices will be released on March 24th. We expect a small uptick in the euro zone composite index, reflecting improving business senti-ment and the recent favourable performance of the industrial sector. LATIN AMERICA

The economic release calendar for Latin America is fairly light in the week ahead (March 21st-25th), leaving Colombia’s fourth quarter GDP release as the key event for the region. In the third quarter of 2010, Colombian real GDP expanded by 3.6% y/y on the back of increasing local demand, especially in the consumer spending and gross fixed capital formation categories. On March 16th, Standard & Poor’s recognized Colombia’s strong economic activity and its resilience to external shocks, prompting the agency to upgrade the country’s long-term sovereign credit rat-ing from “BB+” to “BBB-” with a “stable” outlook. Accord-ingly, Colombia regained an “investment grade” status, which it had lost at the end of the 1990’s. We expect the Colombian economy to continue to expand at a strong pace, at least in the first half of the year, leading to an annual growth rate of 4.6% in 2011. Sustained high oil and commodities prices have and will continue to support a positive outlook for the country.

Oscar Sánchez (416) 862-3174 [email protected]


Daniela Blancas (416) 862-3908 daniela_blancas@scotiacapital

A2

30

35

40

45

50

55

60

65

08 09 10 11

Index

Euro Zone PMI

Services

Manufacturing

Source: Bloomberg, Scotia Economics.

Composite

-20

-15

-10

-5

0

5

10

15

20

25

Jan-09 Jul-09 Jan-10 Jul-10

y/y % change

Colombian Economic Indicators

Source: Bloomberg

Industrial production

Retail sales

-800

-600

-400

-200

0

200

400

600

800

1000

1200

1400

00 02 04 06 08 10

US$ bn

Trade Balance: Japan

Seasonally adjusted. Source: Bloomberg.

Economics

1

Global Views

March 18, 2011

KEY INDICATORS

North America

Key Indicators for the week of March 21 - 25

Forecasts at time of publication. Source: Bloomberg, Scotia Economics.

A3

Country Date Time Event Period BNS Consensus LatestUS 03/21 08:30 Chicago Fed Nat Activity Index FEB -- -- -0.2US 03/21 10:00 Existing Home Sales (MoM) FEB -4.0 -4.5 2.7

CA 03/22 08:30 Leading Indicators (MoM) FEB -- 0.6 0.3CA 03/22 08:30 Retail Sales (MoM) JAN 1.0 1.1 -0.2CA 03/22 08:30 Retail Sales Less Autos (MoM) JAN 0.8 0.7 0.6US 03/22 10:00 House Price Index (MoM) JAN -0.2 -0.2 -0.3MX 03/22 10:00 Aggregate Supply & Demand (YoY) 4Q -- -- 9.3US 03/22 10:00 Richmond Fed Manufacturing Index MAR 22 22 25

US 03/23 07:00 MBA Mortgage Applications (WoW) 18-Mar -- -- -0.7MX 03/23 10:00 Retail Sales (YoY) (INEGI) JAN -- -- 2.6US 03/23 10:00 New Home Sales (MoM) FEB 3.5 2.1 -12.6

US 03/24 08:30 Durable Goods Orders (MoM) FEB 1.0 1.0 3.2US 03/24 08:30 Durables Ex Transportation (MoM) FEB 1.8 2.0 -3.0US 03/24 08:30 Cap Goods Orders Nondef Ex Air (MoM) FEB -- 4.4 -6.2US 03/24 08:30 Initial Jobless Claims (000s) 19-Mar 390 -- 385US 03/24 08:30 Continuing Claims (000s) 12-Mar 3720 -- 3706MX 03/24 10:00 Unemployment Rate (%) FEB -- -- 5.4

US 03/25 08:30 GDP QoQ (Annualized) 4Q T 2.9 3.0 2.8US 03/25 09:55 U. of Michigan Confidence Index MAR F -- 68.0 68.2MX 03/25 10:00 Trade Balance (USD millions) FEB P -- -- 69.3

Economics

2

Global Views

March 18, 2011

KEY INDICATORS

Europe



A4

Country Date Time Event Period BNS Consensus LatestRU MAR 18-24 GDP (YoY) 4Q P -- -- 2.7RU MAR 18-21 Disposable Income (YoY) FEB -- -1.1 -5.5RU MAR 18-21 Real Wages (YoY) FEB -- 6.0 5.5RU MAR 18-21 Retail Sales (Real) (MoM) FEB -- -1.8 -25.0RU MAR 18-21 Unemployment Rate (%) FEB -- 7.5 7.6RU MAR 18-21 Investment In Productive Capacity (YoY) FEB -- 0.3 -4.7

UK 03/20 20:01 Rightmove House Prices (MoM) MAR -- -- 3.1

FR 03/21 04:00 PMI Manufacturing Index MAR P -- -- 55.7FR 03/21 04:00 PMI Services Index MAR P -- -- 59.7

UK 03/22 05:30 CPI (YoY) FEB 4.2 4.2 4.0UK 03/22 05:30 Core CPI (YoY) FEB 3.1 -- 3.0UK 03/22 05:30 Public Finances (PSNCR) FEB -- -- -14.4UK 03/22 05:30 Public Sector Net Borrowing (GBP billions) FEB -- -- -5.3SP 03/22 Trade Balance (Mln Euros) JAN -- -- -5365.3

UK 03/23 05:30 Bank of England MinutesUK 03/23 05:30 BBA Loans for House Purchase (units) FEB -- -- 28932EC 03/23 06:00 Industrial New Orders SA (MoM) JAN -- -- 2.6TU 03/23 08:00 Benchmark Repo Rate (%) 6.25 -- 6.25UK 03/23 08:30 U.K. Chancellor of the Exchequer Osborne Announces BudgetEC 03/23 11:00 Euro-Zone Consumer Confidence Index MAR A -- -- -10.0

FR 03/24 03:45 Business Confidence Indicator Index MAR -- -- 106.0SP 03/24 04:00 Mortgages on Houses (YoY) JAN -- -- -17.0GE 03/24 04:30 PMI Manufacturing Index MAR A -- 62.0 62.7GE 03/24 04:30 PMI Services Index MAR A -- 58.8 58.6IT 03/24 05:00 Consumer Confidence Index sa MAR -- -- 106.4EC 03/24 05:00 PMI Composite Index MAR A 58.3 -- 58.2EC 03/24 05:00 PMI Manufacturing Index MAR A -- 58.4 59.0EC 03/24 05:00 PMI Services Index MAR A -- 56.4 56.8UK 03/24 05:30 Retail Sales Ex Auto Fuel(MoM) FEB -- -- 1.6UK 03/24 05:30 Retail Sales w/Auto Fuel (MoM) FEB -- -0.5 1.9IR 03/24 07:00 GDP - s.a. (QoQ) 4Q -- -- 0.5CZ 03/24 08:00 Repo Rate Announcement (%) 0.75 0.75FR 03/24 13:00 Jobseekers- Net Change (000s) FEB -- -- -19.3

GE 03/25 03:00 GfK Consumer Confidence Survey APR -- 5.8 6.0FR 03/25 03:45 Consumer Confidence Indicator MAR -- -- 85.0SP 03/25 04:00 Producer Prices (YoY) FEB -- -- 6.8GE 03/25 05:00 IFO - Business Climate Index MAR -- 110.3 111.2IT 03/25 05:00 Retail Sales s.a. (MoM) JAN -- -- 0.2RU 03/25 Russia Refinancing Rate (%) 8.25 -- 8.00

Economics

3

Global Views

March 18, 2011

KEY INDICATORS

Asia Pacific



A5

Country Date Time Event Period BNS Consensus LatestID MAR 20-25 Total Local Auto Sales (units) FEB -- -- 73849PH MAR 20-25 Budget Deficit/Surplus (PHP billions) FEB -- -- 13.4TH MAR 20-25 Customs Trade Balance (USD millions) FEB -- -- -856.8

TA 03/21 04:00 Export Orders (YoY) FEB -- 11.7 13.5

TA 03/22 04:00 Unemployment Rate - sa (%) FEB -- 4.7 4.7NZ 03/22 17:45 Current Account Balance (NZD billions) 4Q -- -- -1.8

SL MAR 22-23 GDP (YoY) 4Q -- 8.0 8.0SI 03/23 01:00 CPI (YoY) FEB -- 5.2 5.5TA 03/23 04:00 Industrial Production (YoY) FEB -- 15.6 17.2NZ 03/23 17:45 GDP (QoQ) 4Q -- -- -0.2AU 03/23 19:00 Conference Board Leading Index JAN -- -- 0.7JN 03/23 19:50 Merchandise Trade Balance Total (JPY billions) FEB -- 883.4 -471.4CH 03/23 22:30 HSBC Flash China Manufacturing PMI MAR -- -- 0.0

PH 03/24 04:00 Overnight Borrowing Rate (%) 4.00 4.25 4.00HK 03/24 04:30 Trade Balance (HKD billions) FEB -- -28.8 -16.0SK 03/24 17:00 SK Consumer Confidence Index MAR -- -- 105.0JN 03/24 19:30 Natl CPI (YoY) FEB -- 0.0 0.0JN 03/24 19:30 Natl CPI Ex Food, Energy (YoY) FEB -- -0.7 -0.6JN 03/24 19:50 Corp Service Price Index (YoY) FEB -- -- -1.1PH 03/24 21:00 Trade Balance (USD billions) JAN -- -- -729.0

SI 03/25 01:00 Industrial Production (MoM) sa FEB -- 2.5 15.4MA 03/25 05:00 CPI (YoY) FEB -- 2.4 2.4

Latin America

Country Date Time Event Period BNS Consensus LatestBZ 03/21 07:30 Central Bank Weekly Economists Survey

MX 03/22 10:00 Aggregate Supply & Demand (YoY) 4Q -- -- 9.3

BZ 03/23 07:00 FGV CPI IPC-S (WoW) 22-Mar -- -- 0.6BZ 03/23 08:00 IBGE CPI IPCA-15 (MoM) MAR -- 0.5 1.0MX 03/23 10:00 Retail Sales (INEGI) JAN -- -- 2.6

BZ 03/24 08:00 Unemployment Rate (%) FEB -- -- 6.1MX 03/24 10:00 Unemployment Rate (%) FEB -- -- 5.4MX 03/24 11:00 Bi-Weekly Core CPI (WoW) 15-Mar -- -- 0.1MX 03/24 11:00 Bi-Weekly CPI (WoW) 15-Mar -- -- 0.2CO 03/24 12:00 GDP (YoY) 4Q 4.0 3.8 3.6CO 03/24 12:00 GDP (Annual Growth Rate) 2010 -- -- 0.8

BZ 03/25 09:30 Current Account - Monthly (USD millions) FEB -- -- -5409.3BZ 03/25 09:30 Foreign Investment (USD billions) FEB -- -- 2956.0MX 03/25 10:00 Trade Balance (USD millions) FEB P -- -- 69.3

Economics

4

Global Views

March 18, 2011

AUCTIONS

Country Date Time EventNO 03/21 06:00 Norway to Sell NOK3 Bln 5% 2015 BondsGE 03/21 06:15 Germany to Sell Add'l EU2 Bln 9-Mth BillsNE 03/21 07:00 Netherlands to Sell up to EUR2 Bln 191-Day BillsNE 03/21 07:00 Netherlands to Sell up to EUR2 Bln 222-Day BillsNE 03/21 07:00 Netherlands to Sell up to EUR2 Bln 99-Day BillsFR 03/21 10:00 France to Sell EUR4.5 Bln 91-Day BillsFR 03/21 10:00 France to Sell EUR1.5 Bln 168-Day BillsFR 03/21 10:00 France to Sell EUR2.5 Bln 350-Day Bills

DE 03/22 05:15 Denmark to Sell BondsSP 03/22 05:30 Spain to Sell 3M and 6M BillsSZ 03/22 06:30 Switzerland to Sell 3-Month Bills

GE 03/23 06:15 Germany to Sell Add'l EU4 Bln 10-Year NotesRU 03/23 07:00 Russia to Sell Up to RUB25 Bln OFZ Bonds

UK 03/25 07:10 U.K. to Sell Bills

North America

Europe

Global Auctions for the week of March 21 - 25


A6

Country Date Time EventUS 03/21 11:00 U.S. Fed to Purchase USD1.5-2.5 Bln Notes/BondsUS 03/21 11:30 U.S. to Sell 3-Month BillsUS 03/21 11:30 U.S. to Sell 6-Month Bills

US 03/22 11:00 U.S. Fed to Purchase USD6.5-8.5 Bln Notes/BondsUS 03/22 11:30 U.S. to Sell 4-Week Bills

US 03/23 11:00 U.S. Fed to Purchase USD6.5-8.5 Bln Notes/BondsCA 03/23 12:00 Canada to Sell 3-Year Notes

US 03/24 11:00 U.S. Fed to Purchase USD5.5-7.5 Bln Notes/BondsUS 03/24 13:00 U.S. to Sell 10-Year TIPS Reopening

US 03/25 11:00 U.S. Fed to Purchase USD4-6 Bln Notes/Bonds

Economics

5

Global Views

March 18, 2011

AUCTIONS

Asia Pacific

Global Auctions for the week of March 21 - 25


A7

Country Date Time EventUS 3/7/2011 11:00 U.S. Fed to Purchase USD5-7 Bln Notes/BondsUS 3/7/2011 11:30 U.S. to Sell 3-Month BillsUS 3/7/2011 11:30 U.S. to Sell 6-Month Bills

US 3/8/2011 11:00 U.S. Fed to Purchase USD6-8 Bln Notes/BondsUS 3/8/2011 11:30 U.S. to Sell 4-Week BillsUS 3/8/2011 11:30 U.S. to Sell 52-Week BillsUS 3/8/2011 13:00 U.S. to Sell 3-Year Notes

US 3/9/2011 11:00 U.S. Fed to Purchase USD5-7 Bln Notes/BondsCA 3/9/2011 12:00 Canada to Sell 2-Year NotesUS 3/9/2011 13:00 U.S. to Sell 10-Year Notes Reopening

US 3/10/2011 13:00 U.S. to Sell 30-Year Bonds Reopening

Country Date Time EventSK 03/20 22:30 Korea to Sell KRW1.6 Tln 10-Year Bonds

MA 03/21 Bank Negara to Sell MYR2 Bln 128-Day NotesMA 03/21 Bank Negara to Sell MYR1 Bln 306-Day NotesMA 03/21 Bank Negara to Sell MYR1 Blln 91-Day Islamic BillsSI 03/21 Singapore To Sell S$3.9 billion 91-Day T-BillsPH 03/21 01:00 Philippines to Sell PHP 1 Bln 91D T-billsPH 03/21 01:00 Philippines to Sell PHP 3.5 Bln 182D T-billsPH 03/21 01:00 Philippines to Sell PHP 4 Bln 364D T-billsCH 03/21 01:00 Agricultural Dev Bank to Sell CNY15 Bln 7-Year BondsAU 03/21 20:00 Australia Plans to Sell CIB BondsTH 03/21 23:00 Bank of Thailand to Sell THB25 Bln 28D BillsTH 03/21 23:00 Bank of Thailand to Sell THB20 Bln 91D BillsTH 03/21 23:00 Bank of Thailand to Sell THB12 Bln 182D BillsHK 03/21 23:30 Hong Kong to Sell HKD28.791 Bln 91-D BillsJN 03/21 23:35 Japan to Sell 3-Month Bills

JN 03/22 04:00 Japan Auction for Enhanced-LiquidityID 03/22 04:30 Indonesia to Sell 5-Yr to Maturity Government BondID 03/22 04:30 Indonesia to Sell 20-Yr to Maturity Government BondID 03/22 04:30 Indonesia to Sell 1-Yr to Maturity Treasury BillsCH 03/22 23:00 China Government to Sell CNY30 Bln 1-Year BondsHK 03/22 23:30 Hong Kong to Sell HKD9 Bln 182-Day BillsJN 03/22 23:35 Japan to Sell 3-Month Bills

SL 03/23 03:30 Sri Lanka to Sell 91-Day BillsSL 03/23 03:30 Sri Lanka to Sell 182-Day BillsSL 03/23 03:30 Sri Lanka to Sell 364-Day BillsIN 03/23 07:30 India to Sell INR 50Bln 91-Day BillsIN 03/23 07:30 India to Sell INR 30Bln 364-Day BillsNZ 03/23 21:30 New Zealand Plans to Sell Government BondsJN 03/23 23:45 Japan to Sell 2-Year Bond

Economics

6

Global Views

March 18, 2011

EVENTS

Country Date Time EventUS 03/22 07:30 Fed's Fisher Speaks at Frankfurt Finance SummitUS 03/22 08:00 Fed's Pianalto Speaks on Economy in Akron, OhioCA 03/22 16:00 Canada Finance Minister Flaherty Presents 2011 Budget

US 03/23 12:00 Bernanke Speaks to Bankers in San Diego

US 03/25 05:00 Kocherlakota Speaks at Conference in Marseilles, FranceEC 03/25 07:30 Dallas Fed's Fisher Speaks at Think Tank in BrusselsUS 03/25 08:30 Fed's Evans Speaks to Reporters at Chicago FedUS 03/25 09:15 Fed's Lockhart Speaks on Economy in Fort Myers, FloridaCA 03/25 11:15 Finance Minister Flaherty Speaks in MontrealUS 03/25 12:15 Fed's Plosser Speaks on Monetary Policy in New York

Country Date Time EventEC 03/20 EU Trade Ministers Meet in BrusselsGE 03/20 German State Election in Saxony-Anhalt

LX 03/21 04:00 ECB's Mersch Gives Press Conference in LuxembourgEC 03/21 05:00 EU Foreign Ministers Meet in BrusselsEC 03/21 09:30 Euro-Area Finance Ministers to Hold Special MeetingEC 03/21 13:00 EU-27 Finance Chiefs Meet on Permanent Rescue Facility

GE 03/22 04:00 Deutsche Bank Expects German Top Court Landmark Swap RulingSZ 03/22 05:00 Swiss Financial Regulator Holds Press BriefingSZ 03/22 06:30 Swiss Central Bank President Speaks in Geneva

UK 03/23 05:30 Bank of England Releases Monetary Policy Committee MinutesTU 03/23 08:00 Benchmark Repo RateEC 03/23 08:15 CEPS Holds Conference on Future of Euro ZoneUK 03/23 08:30 U.K. Chancellor of the Exchequer Osborne Announces BudgetGE 03/23 13:00 Merkel At Baden-Wuerttemberg Election Rally: Ludwigsburg

HU 03/24 05:00 Hungary State Secretary Varga Speaks on Fiscal ProgramEC 03/24 07:00 EU Liberal Leaders Meet Before SummitEC 03/24 08:00 EU Conservative Leaders Meet Before SummitCZ 03/24 08:00 Repo Rate AnnouncementSZ 03/24 13:00 SNB's Danthine Holds Speech in ZurichEC MAR 24-25 EU Leaders Hold Summit in Brussels

GE 03/25 11:00 Merkel Speech At Saxony-Anhalt Election Rally: DessauEC 03/25 11:30 Van Rompuy, Leterme, Tusk Speak at GMF ConferenceGE 03/25 14:00 Merkel At Baden-Wuerttemberg Election Rally: MannheimEC 03/25 14:30 EU's Barroso Speaks at GMF ConferenceRU 03/25 Russia Refinancing Rate

Country Date Time EventTH 03/21 22:00 Euromoney Conference Day 2- BOT Governor Speech

JN 03/22 21:30 BOJ Board Member Ryuzo Miyao to Speak in Oita City

PH 03/24 04:00 Overnight Borrowing Rate


Events for the week of March 21 - 25

North America

Europe

Asia Pacific

A8

Economics

7

Global Views

March 18, 2011

Rate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsBank of Canada – Overnight Target Rate 1.00 April 12, 2011 1.00 --

Federal Reserve – Federal Funds Target Rate 0.25 April 27, 2011 0.25 --

Banco de México – Overnight Rate 4.50 April 15, 2011 4.50 --

EUROPERate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsEuropean Central Bank – Refinancing Rate 1.00 April 7, 2011 1.00 1.25

Bank of England – Bank Rate 0.50 April 7, 2011 0.50 0.50

Swiss National Bank – Libor Target Rate 0.25 June 16, 2011 0.25 --

Central Bank of Russia – Refinancing Rate 8.00 March 25, 2011 8.25 --

Hungarian National Bank – Base Rate 6.00 March 28, 2011 6.00 6.00

Central Bank of the Republic of Turkey –1 Week Repo Rate

6.25 March 23, 2011 6.25 6.25

ASIA PACIFICRate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsBank of Japan – Target Rate 0.10 April 7, 2011 0.10 --

Reserve Bank of Australia – Cash Target Rate 4.75 April 4, 2011 4.75 4.75

Reserve Bank of New Zealand – Cash Rate 2.50 April 27, 2011 3.00 --

People's Bank of China – Lending Rate 6.06 TBA 6.06 --

Reserve Bank of India – Repo Rate 6.75 May 3, 2011 6.50 --

Hong Kong Monetary Authority – Base Rate 0.50 TBA 0.50 --

Bank Negara Malaysia – Overnight Policy Rate 2.75 May 5, 2011 2.75 --

Bank of Korea – Bank Rate 3.00 April 11, 2011 3.00 --

Bank of Thailand – Repo Rate 2.50 April 20, 2011 2.50 --

Bank Indonesia – Reference Interest Rate 6.75 April 12, 2011 6.75 --

LATIN AMERICARate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsBanco Central do Brasil – Selic Rate 11.75 April 20, 2011 12.25 11.75

Banco Central de Chile – Overnight Rate 4.00 April 12, 2011 4.25 --

Banco de la República de Colombia – Lending Rate 3.50 April 29, 2011 3.50 --

Banco Central de Reserva del Perú – Reference Rate 3.75 April 7, 2011 3.75 --

AFRICARate Current Rate Next Meeting Scotia's Forecasts Consensus ForecastsSouth African Reserve Bank – Repo Rate 5.50 March 24, 2011 5.50 5.50

The FOMC kept benchmark rates unchanged at the March-15 meeting. The accompanying statement signaled no policy shift, but hinted at somewhat greater optimism, perhaps to avoid dissent. Recent data volatility in Canada further reinforces our view that the BoC will likely remain on hold until October. We expect no tone shift in the April Monetary Policy Report that would justify a Spring rate call.

Inflationary pressures remain virtually absent in Switzerland; therefore, the SNB left the Libor target rate unchanged at 0.25% following the quarterly policy meeting on March 17. We expect it to maintain the expansionary policy stance until Q4 2011 when a gradual process of monetary policy normalization begins.

We expect the central bank of the Phillipines to stay put as underlying inflation remains low with the headline rising in January. The benchmark repo rate was lifted to 6.75% in India, as wholesale price inflation rebounded again in February. This time, price acceleration was caused by fuel cost increases with primary goods inflation still downtrending. Rising manufacturing costs have been affected for the first time in six months.

On the back of high international commodity prices and a shift in inflation expectations, the Bank of Chile raised its benchmark interest rate by 50 basis points to 4.0%, exceeding the market’s expectations and increasing the pace of its tightening cycle. The central bank has raised the policy rate by a total of 350 basis points since the second quarter of 2010. In addition, Colombia increased its benchmark interest rate by 25 basis points to 3.5%, as a preemptive action to maintain inflation expectations within the target range.

Global Central Bank Watch

North America

Europe

Asia Pacific

Latin America

Africa

CENTRAL BANKS

A9


Economics

8

Global Views

March 18, 2011

FORECASTS

2000-09 2010e 2011f 2012f 2000-09 2010e 2011f 2012f

Output and Inflation (annual % change) Real GDP Consumer Prices2

World1 3.6 4.9 4.4 4.4

Canada 2.1 3.1 3.1 2.6 2.1 1.8 2.4 2.2 United States 1.8 2.8 3.0 2.7 2.6 1.6 1.9 1.8 Mexico 1.9 5.5 4.3 3.8 4.9 4.4 4.1 4.0

United Kingdom 2.7 1.3 1.4 1.7 2.2 3.7 3.6 2.9 Euro zone 1.2 1.7 1.4 1.6 2.1 2.2 2.4 2.3

Japan 0.7 3.4 1.6 2.7 -0.3 -0.5 0.1 1.0 Australia 3.0 3.0 3.5 3.3 3.2 3.0 2.8 2.5 China 10.2 10.3 9.5 9.7 2.0 3.5 4.5 4.0 India 7.2 8.7 8.5 8.8 5.7 8.4 7.0 5.0 Korea 4.5 5.8 5.5 5.3 3.2 3.0 3.3 3.0

Brazil 2.9 7.6 5.5 5.0 6.6 5.9 5.2 5.0 Chile 3.7 5.0 6.0 5.5 3.4 3.7 3.5 3.0 Peru 5.1 8.5 6.8 7.2 2.5 2.4 3.0 3.0

Central Bank Rates (%, end of period) 11Q1f 11Q2f 11Q3f 11Q4f 12Q1f 12Q2f 12Q3f 12Q4f

Bank of Canada 1.00 1.00 1.00 1.50 2.00 2.25 2.25 2.25Federal Reserve 0.25 0.25 0.25 0.25 0.75 1.25 1.75 2.00European Central Bank 1.00 1.00 1.00 1.25 1.50 1.75 2.00 2.25Bank of England 0.50 0.50 0.50 0.75 1.00 1.25 1.50 1.75Swiss National Bank 0.25 0.25 0.25 0.50 0.50 0.75 0.75 1.00Bank of Japan 0.10 0.10 0.10 0.10 0.10 0.25 0.25 0.50Reserve Bank of Australia 5.00 5.00 5.25 5.50 5.75 6.00 6.25 6.50

Exchange Rates (end of period)

Canadian Dollar (USDCAD) 0.98 0.97 0.96 0.95 0.95 0.94 0.93 0.92Canadian Dollar (CADUSD) 1.02 1.03 1.04 1.05 1.05 1.06 1.08 1.09Euro (EURUSD) 1.35 1.37 1.38 1.39 1.39 1.41 1.43 1.45Sterling (GBPUSD) 1.58 1.60 1.61 1.63 1.65 1.67 1.69 1.70Yen (USDJPY) 82 83 84 84 86 87 89 90Australian Dollar (AUDUSD) 1.03 1.05 1.06 1.08 1.07 1.08 1.09 1.10Chinese Yuan (USDCNY) 6.5 6.4 6.2 6.1 6.0 5.9 5.8 5.8Mexican Peso (USDMXN) 12.2 12.2 12.2 12.5 12.6 12.5 12.6 12.8Brazilian Real (USDBRL) 1.67 1.68 1.69 1.70 1.71 1.72 1.74 1.75

Commodities (US$, annual average) 2000-09 2010 2011f 2012f

WTI Oil (/bbl) 51 80 97 100Brent Oil (/bbl) 50 80 110 112Nymex Natural Gas (/mmbtu) 5.95 4.40 4.40 4.75

Copper (/lb) 1.78 3.42 4.30 4.00Zinc (/lb) 0.73 0.98 1.09 1.09Nickel (/lb) 7.11 9.89 10.90 8.75Gold, London PM Fix (/oz) 522 1,225 1,425 1,350

Pulp (/tonne) 668 960 945 935Newsprint (/tonne) 572 607 675 710Lumber (/mfbm) 275 254 265 300

1 World GDP for 2000-09 are IMF estimates; 2010-12f are Scotia Economics' estimates based on a 2009 PPP-weighted sample of 34 countries. 2 CPI for Canada and the United States are annual averages. For other countries, CPI are year-end rates.

A10

Economics

9

Global Views

March 18, 2011

ECONOMIC STATISTICS


Canada 2010 10Q3 10Q4 Latest United States 2010 10Q3 10Q4 Latest Real GDP (annual rates) 3.1 1.8 3.3 Real GDP (annual rates) 2.8 2.6 2.8 Current Acc. Bal. (C$B, ar) -50.0 -67.9 -44.2 Current Acc. Bal. (US$B, ar) -502 -453 Merch. Trade Bal. (C$B, ar) -9.1 -26.1 0.1 1.4 (Jan) Merch. Trade Bal. (US$B, ar) -647 -683 -625 -717 (Jan) Industrial Production 4.7 7.9 5.9 6.3 (Dec) Industrial Production 5.8 6.9 5.9 5.3 (Feb) Housing Starts (000s) 192 192 179 182 (Feb) Housing Starts (millions) 0.59 0.59 0.53 0.48 (Feb) Employment 1.4 1.8 1.7 1.9 (Feb) Employment -0.8 -0.1 0.5 1.0 (Feb) Unemployment Rate (%) 8.0 8.0 7.7 7.8 (Feb) Unemployment Rate (%) 9.6 9.6 9.6 8.9 (Feb) Retail Sales 5.1 3.7 4.7 4.9 (Dec) Retail Sales 6.9 6.1 8.1 9.5 (Feb) Auto Sales (000s) 1559 1609 1556 1513 (Dec) Auto Sales (millions) 11.5 11.6 12.3 13.4 (Feb) CPI 1.8 1.8 2.3 2.2 (Feb) CPI 1.6 1.2 1.3 2.1 (Feb) IPPI 1.0 1.0 2.6 -2.7 (Jan) PPI 4.2 3.8 3.9 5.6 (Feb) Pre-tax Corp. Profits 18.4 15.3 16.2 Pre-tax Corp. Profits 34.8

Mexico Brazil Real GDP 5.5 5.3 4.6 Real GDP 6.7 5.9 4.2 Current Acc. Bal. (US$B, ar) -5.7 -7.7 -14.5 Current Acc. Bal. (US$B, ar) -47.5 -45.6 -47.9 Merch. Trade Bal. (US$B, ar) -3.1 -9.2 -4.6 0.8 (Jan) Merch. Trade Bal. (US$B, ar) 20.3 19.6 30.1 14.4 (Feb) Industrial Production 6.1 6.2 4.7 6.6 (Jan) Industrial Production 10.5 8.1 3.5 1.9 (Jan) CPI 4.2 3.7 4.2 3.6 (Feb) CPI 5.1 5.0 6.1 6.9 (Feb)

Argentina Italy Real GDP 8.6 Real GDP 1.2 1.4 1.5 Current Acc. Bal. (US$B, ar) 3.6 Current Acc. Bal. (US$B, ar) -0.07 -0.05 -0.07 -0.13 (Jan) Merch. Trade Bal. (US$B, ar) 12.1 12.0 6.2 6.2 (Jan) Merch. Trade Bal. (US$B, ar) -36.6 -22.9 -44.4 -105.0 (Jan) Industrial Production 9.7 9.3 10.6 10.3 (Jan) Industrial Production 5.4 6.3 4.1 0.9 (Jan) CPI 66.4 89.8 54.9 0.0 (Jun) CPI 1.6 1.6 1.8 2.3 (Feb)

Germany France Real GDP 3.5 3.9 4.0 Real GDP 1.7 2.0 1.7 Current Acc. Bal. (US$B, ar) 172.6 165.7 250.8 115.2 (Jan) Current Acc. Bal. (US$B, ar) -52.7 -41.8 -88.6 -60.9 (Jan) Merch. Trade Bal. (US$B, ar) 201.5 207.6 219.8 189.3 (Jan) Merch. Trade Bal. (US$B, ar) -38.7 -42.0 -38.3 -52.9 (Jan) Industrial Production 10.0 10.2 11.5 12.4 (Jan) Industrial Production 5.8 5.2 5.8 5.4 (Jan) Unemployment Rate (%) 7.7 7.6 7.5 7.3 (Feb) Unemployment Rate (%) 9.8 9.7 9.7 9.6 (Jan) CPI 1.1 1.2 1.5 2.1 (Feb) CPI 1.5 1.5 1.6 1.7 (Feb)

Euro Zone United Kingdom Real GDP 1.7 1.9 2.0 Real GDP 1.3 2.5 1.5 Current Acc. Bal. (US$B, ar) -77 -43 -41 -314 (Jan) Current Acc. Bal. (US$B, ar) -63.9 Merch. Trade Bal. (US$B, ar) 0.0 43.0 53.2 -216.0 (Jan) Merch. Trade Bal. (US$B, ar) -151.4 -159.3 -169.6 -133.6 (Jan) Industrial Production 7.2 7.1 7.9 6.6 (Jan) Industrial Production 2.0 3.0 3.3 4.5 (Jan) Unemployment Rate (%) 9.9 9.9 9.9 9.9 (Jan) Unemployment Rate (%) 7.9 7.8 7.9 8.0 (Dec) CPI 1.6 1.7 2.0 2.4 (Feb) CPI 3.3 3.1 3.4 4.0 (Jan)

Japan Australia Real GDP 4.0 4.7 2.5 Real GDP 2.7 2.7 2.7 Current Acc. Bal. (US$B, ar) 194.8 227.5 172.5 67.1 (Jan) Current Acc. Bal. (US$B, ar) -31.8 -29.2 -34.4 Merch. Trade Bal. (US$B, ar) 77.7 90.7 80.9 27.9 (Jan) Merch. Trade Bal. (US$B, ar) 19.1 27.5 25.4 18.4 (Jan) Industrial Production 16.0 12.9 5.0 1.8 (Jan) Industrial Production 4.3 4.2 -0.3 Unemployment Rate (%) 5.1 5.0 5.0 4.9 (Jan) Unemployment Rate (%) 5.2 5.2 5.2 5.0 (Feb) CPI -0.7 -0.8 0.1 0.0 (Jan) CPI 2.8 2.8 2.7

China South Korea Real GDP 10.3 9.6 9.8 Real GDP 6.1 4.4 4.8 Current Acc. Bal. (US$B, ar) 290.0 Current Acc. Bal. (US$B, ar) 28.2 39.7 36.6 2.7 (Jan) Merch. Trade Bal. (US$B, ar) 182.7 260.6 250.4 -87.7 (Feb) Merch. Trade Bal. (US$B, ar) 41.2 42.5 52.1 29.5 (Feb) Industrial Production 13.5 13.3 13.5 14.9 (Feb) Industrial Production 16.6 12.9 9.9 15.1 (Jan) CPI 4.6 3.6 4.6 4.9 (Feb) CPI 3.0 2.9 3.6 4.5 (Feb)

All data expressed as year-over-year % change unless otherwise noted.

A11

Economics

10

Global Views

March 18, 2011

FINANCIAL STATISTICS

* Latest observation taken at time of writing. Source: Bloomberg, Scotia Economics.

Interest Rates (%, end of period)

Canada 10Q3 10Q4 Mar/11 Mar/18* United States 10Q3 10Q4 Mar/11 Mar/18*BoC Overnight Rate 1.00 1.00 1.00 1.00 Fed Funds Target Rate 0.25 0.25 0.25 0.25 3-mo. T-bill 1.01 1.05 0.94 0.91 3-mo. T-bill 0.15 0.12 0.07 0.06 10-yr Gov’t Bond 2.76 3.12 3.28 3.18 10-yr Gov’t Bond 2.51 3.29 3.40 3.28 30-yr Gov’t Bond 3.36 3.53 3.75 3.72 30-yr Gov’t Bond 3.68 4.33 4.55 4.43 Prime 3.00 3.00 3.00 3.00 Prime 3.25 3.25 3.25 3.25 FX Reserves (US$B) 59.4 57.0 58.6 (Jan) FX Reserves (US$B) 122.1 121.4 122.9 (Jan)

Germany France 3-mo. Interbank 0.86 0.96 1.17 1.01 3-mo. T-bill 0.51 0.40 0.77 0.74 10-yr Gov’t Bond 2.28 2.96 3.21 3.18 10-yr Gov’t Bond 2.66 3.36 3.56 3.52 FX Reserves (US$B) 62.4 62.3 62.9 (Jan) FX Reserves (US$B) 52.2 55.8 56.4 (Jan)

Euro-Zone United Kingdom Refinancing Rate 1.00 1.00 1.00 1.00 Repo Rate 0.50 0.50 0.50 0.50 Overnight Rate 0.88 0.82 0.80 0.70 3-mo. T-bill 4.85 4.85 4.85 4.85 FX Reserves (US$B) 300.1 300.3 309.7 (Jan) 10-yr Gov’t Bond 2.95 3.40 3.55 3.52

FX Reserves (US$B) 67.2 68.3 72.7 (Jan)

Japan Australia Discount Rate 0.30 0.30 0.30 0.30 Cash Rate 4.50 4.75 4.75 4.75 3-mo. Libor 0.15 0.13 0.13 0.14 10-yr Gov’t Bond 4.96 5.55 5.48 5.40 10-yr Gov’t Bond 0.94 1.13 1.26 1.22 FX Reserves (US$B) 38.1 38.7 37.0 (Jan) FX Reserves (US$B) 1077.4 1061.5 1060.3 (Jan)

Exchange Rates (end of period)

USDCAD 1.03 1.00 0.97 0.98 ¥/US$ 83.52 81.16 81.86 81.12CADUSD 0.97 1.00 1.03 1.02 US¢/Australian$ 96.71 102.33 101.38 99.49GBPUSD 1.572 1.561 1.608 1.619 Chinese Yuan/US$ 6.69 6.59 6.57 6.57EURUSD 1.363 1.339 1.390 1.414 South Korean Won/US$ 1138 1125 1123 1126JPYEUR 0.88 0.92 0.88 0.87 Mexican Peso/US$ 12.593 12.360 11.911 12.060USDCHF 0.98 0.93 0.93 0.90 Brazilian Real/US$ 1.688 1.660 1.665 1.673

Equity Markets (index, end of period)

United States (DJIA) 10788 11578 12044 11888 U.K. (FT100) 5549 5900 5829 5724 United States (S&P500) 1141 1258 1304 1283 Germany (Dax) 6229 6914 6981 6675 Canada (S&P/TSX) 12369 13443 13674 13842 France (CAC40) 3715 3805 3929 3813 Mexico (Bolsa) 33330 38551 36091 35617 Japan (Nikkei) 9369 10229 10254 9207 Brazil (Bovespa) 69430 69305 66685 67162 Hong Kong (Hang Seng) 22358 23035 23250 22300 Italy (BCI) 1033 1048 1129 1077 South Korea (Composite) 1873 2051 1956 1981

Commodity Prices (end of period)

Pulp (US$/tonne) 990 960 960 960 Copper (US$/lb) 3.65 4.42 4.10 4.32 Newsprint (US$/tonne) 638 640 640 640 Zinc (US$/lb) 0.99 1.10 1.03 1.05 Lumber (US$/mfbm) 236 308 299 294 Gold (US$/oz) 1307.00 1405.50 1411.50 1420.00 WTI Oil (US$/bbl) 79.97 91.38 101.16 101.45 Silver (US$/oz) 22.07 30.63 34.10 35.15 Natural Gas (US$/mmbtu) 3.87 4.41 3.89 4.15 CRB (index) 286.86 332.80 351.88 352.08

A12

This report has been prepared by SCOTIA CAPITAL INC. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotia Capital Inc., nor its affiliates accept liability whatsoever for any loss arising from any use of this report or its contents. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. Scotia Capital Inc., its affiliates and/or their respective officers, directors or employees may from time to time acquire, hold or sell securities and/or commodities and/or commodity futures contracts mentioned herein as principal or agent. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent of Scotia Capital. SCI is authorized and regulated by The Financial Services Authority. U.S. residents: Scotia Capital (USA) Inc., a wholly owned subsidiary of Scotia Capital Inc., accepts responsibility for the contents herein, subject to the terms and limitations set out above. Any U.S. person wishing further information or to effect transactions in any security discussed herein should contact Scotia Capital (USA) Inc. at 212-225-6500. Each research analyst named in this report or any subsection of this report certifies that (1) the views expressed in this report in connection with securities or issuers that he or she analyzes accurately reflect his or her personal views; and (2) no part of his or her compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed by him or her in this report. The Research Analyst's compensation is based on various performance and market criteria and is charged as an expense to certain departments of Scotia Capital Inc., including investment banking. Scotia Capital Inc. and/or its affiliates: expects to receive or intends to seek compensation for investment banking services from issuers covered in this report within the next three months; and has or seeks a business relationship with the issuers referred to herein which involves providing services, other than securities underwriting or advisory services, for which compensation is or may be received. These may include services relating to lending, cash management, foreign exchange, securities trading, derivatives, structured finance or precious metals.

Economics Global Views

Scotia Economics

Scotia Plaza 40 King Street West, 63rd Floor

Toronto, Ontario Canada M5H 1H1

Tel: (416) 866-6253 Fax: (416) 866-2829

Email: [email protected]

For general and publication-related inquiries, contact

us by telephone, email and/or fax.

DISCLAIMER

global views 03-18-11 - scotiabank global banking and … swans to continue trumping data flow in...

Documents